UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
Securities Exchange Act of 1934
Release No. 37128 / April 19, 1996
Accounting and Auditing Enforcement
Release No. 775/ April 19, 1996
Administrative Proceeding
File No. 3-8988
_______________________________
:
In the Matter of : ORDER INSTITUTING PUBLIC
: PROCEEDINGS PURSUANT TO
: SECTION 21C OF THE
: SECURITIES EXCHANGE ACT OF
CENTURI, INC., : 1934 AND FINDINGS AND ORDER
: OF THE COMMISSON
:
:
Respondent. :
:
_______________________________
I.
The Commission deems it appropriate and in the public
interest to institute public administrative proceedings against
Centuri, Inc. ("Centuri") pursuant to Section 21C of the
Securities Exchange Act of 1934 ("Exchange Act"). Accordingly,
IT IS HEREBY ORDERED that these proceedings be, and hereby are,
instituted.
II.
In anticipation of the institution of these administrative
proceedings, Centuri has submitted an Offer of Settlement, which
the Commission has determined to accept. Solely for the purpose
of these proceedings, and any other proceeding brought by or on
behalf of the Commission or to which the Commission is a party,
and without admitting or denying the findings or conclusions set
forth below in Part III, Centuri consents to the issuance of this
Order Instituting Public Proceedings Pursuant to Section 21C of
the Exchange Act, Making Findings and Order of the Commission
("Order"), and to the findings and imposition of the cease and
desist order set forth below.
==========================================START OF PAGE 2======
III.
On the basis of this Order and the Respondent's Offer of
Settlement, the Commission finds the following:-[1]-
A. FACTS
1. Respondent
Centuri is a Florida corporation with its principal
executive offices located in Vestal, New York. Centuri's common
stock is registered with the Commission under Section 12(g) of
the Exchange Act, and at the time of the events discussed in this
Order, trades in Centuri's common stock were reported on the
National Association of Securities Dealers Automated Quotation
System ("NASDAQ"). Centuri filed for Chapter 11 bankruptcy
protection on July 2, 1991, and was granted such protection on
September 13, 1991. Centuri's reorganization plan was approved
in November 1993.
2. Related Entity and Individual
Outdoor Sports Headquarters, Incorporated ("OSHI") was, at
all relevant times, a wholly-owned subsidiary of Centuri, engaged
in the wholesale distribution of outdoor sporting goods. OSHI
was Centuri's largest subsidiary in 1989 and 1990. In 1989, OSHI
accounted for 90% of Centuri's consolidated net sales. OSHI's
principal executive offices are located in Dayton, Ohio. OSHI
filed for Chapter 11 bankruptcy protection at the same time as
Centuri. OSHI's plan of reorganization was approved in June
1992.
3. Summary
Centuri violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B)
of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 by filing
materially inaccurate periodic reports with the Commission,
failing to file periodic reports with the Commission, failing to
keep accurate books and records, and failing to devise and
maintain internal controls. In its periodic reports and on its
books and records, Centuri materially overstated its net income
and accounts receivable and materially understated its accounts
payable and accrued liabilities. These misstatements were caused
by improper accounting practices at OSHI.
4. Centuri Made Material Misstatements in Its Form 10-K
for 1989
-[1]- The Commission's findings herein are not
binding upon any other person or entity in this or any other
proceeding.
==========================================START OF PAGE 3======
Centuri made material misstatements in the financial
statements included in its Form 10-K for the year 1989, filed
with the Commission on March 27, 1990 ("1989 Form 10-K").
Specifically, Centuri materially overstated its net income and
accounts receivable, and materially understated its accounts
payable and accrued liabilities. Each of these misstatements
resulted from improper accounting practices at OSHI. For
example, OSHI staged sales, booked inventory out of period,
failed to timely record certain accounts payable liabilities,
and, in some instances, failed to record certain accounts payable
liabilities all together. OSHI also made improper journal
entries to reduce its accounts payable and increase its accounts
receivable. OSHI also failed to accrue for certain liabilities
as required by Generally Accepted Accounting Principles ("GAAP").
a. Centuri Overstated Its Net Income
Centuri reported in its 1989 Form 10-K net income of
$2,343,551 when it should have reported a net loss of $5,200,543.
OSHI caused Centuri to understate cost of sales by $5,382,259,
understate operating expenses by $1,524,919 and to overstate
sales by $928,916 for 1989. Thus, Centuri's net income in its
1989 Form 10-K was overstated by $7,544,094, or 322% of what it
reported.-[2]-
Centuri understated its cost of sales for 1989 by
$5,382,259. Of this $5,382,259 understatement, $3,345,903
related to inventory purchase liabilities which had been
improperly omitted from OSHI's books. OSHI double booked certain
inventory totaling $370,064. OSHI also had no support for
$122,809 of the $123,830 of prepaid inventory it booked in 1989.
On December 31, 1989, OSHI recorded $585,869 of rebates allegedly
due OSHI from its vendors, but for which there was no support.
OSHI also improperly reduced its cost of sales by recording
credit memos for which there were no support ($519,694) and
credit expected from vendors ($418,292). The remainder of
Centuri's $5,382,259 understatement of cost of sales related to
OSHI's failure to amortize its catalogue expense ($124,028),
provision for LIFO ($68,475), invalid inventory adjustments
-[2]- OSHI's deferred state and local tax and
federal income tax accounts were overstated by $93,000 and
$199,000, respectively. These misstatements caused Centuri to
understate its net income by $292,000, the aggregate amount of
these two figures. The $292,000 amount was subtracted from
$7,836,094, which is the total amount by which Wallin inflated
OSHI's 1989 net income, to arrive at the adjustment figure of
$7,544,094.
==========================================START OF PAGE 4======
($38,652) and miscellaneous inventory written off
($11,881).-[3]-
Centuri understated its operating expenses for 1989 by
$1,524,919. This understatement resulted from OSHI's failure to
accrue for health and medical expenses ($495,000), vacation
($278,268), real estate taxes ($85,000) and FICA ($54,411) for
1989. OSHI had an additional $279,100 understatement of
nonoperating expenses for 1989. The rest of the $1,524,919
understatement of Centuri's operating expenses related to OSHI's
moving expenses, the improper statement of a bond discount at
OSHI, and the accrued versus the paid amount of a sales bonus to
OSHI's sales manager.
Centuri overstated sales by $928,916 for 1989. This
overstatement resulted from OSHI's failure to account for cash
discounts that were expected to be taken by customers ($398,000)
and failure to record a reserve for sales returns and allowances
($247,000). The remainder of the overstatement of sales was due
to a $283,916 staged sale at OSHI.
b. Centuri Materially Understated Its Accounts
Payable and Accrued Liabilities
Centuri materially understated its accounts payable
liability by $4,869,758, or 37.5% of the $12,982,271 it reported
in its 1989 Form 10-K. This understatement was due to OSHI's
booking inventory in the wrong period and making improper
reconciling journal entries to reduce accounts payable. OSHI
received and recorded $3,345,903 in inventory as an asset in
1989, but did not record the corresponding accounts payable
liability or pay its vendors for the inventory until 1990 and, in
some instances, OSHI failed to record the accounts payable
liability altogether.
The balance of Centuri's $4,869,758 accounts payable
understatement in 1989 ($1,523,855) was due to OSHI's improper
journal entries to reduce the accounts payable liability. For
example, OSHI's accounts payable was reduced by fabricated items
called "Free Goods, Rebates and DM's due." These items were
goods, rebates and credits allegedly owed OSHI by vendors based
on the volume of OSHI's 1989 and 1990 respective inventory
purchases.
-[3]- Though the adjustments to cost of sales
enumerated above indicate that a $5,605,667 total adjustment to
the account was appropriate, that total amount was reduced by a
$223,408 credit to reconcile inventory.
==========================================START OF PAGE 5======
Centuri materially understated its accrued liabilities by
$910,817 or 14.5% of the $6,296,784 it reported in its 1989 Form
10-K. Centuri's understatement resulted from OSHI's failure to
properly accrue for property and income tax and payroll and its
failure to accrue for employee vacation, FICA, incurred but not
reported medical expenses, and real estate taxes, altogether.
c. Centuri Materially Overstated Its Accounts
Receivable Asset
Centuri overstated its accounts receivable asset by
$1,208,016, or 4.3% of the $28,274,773 amount it reported.
Centuri's overstatement was a direct result of a staged sale at
OSHI, OSHI's failure to accrue for cash discounts and returns and
allowances, and miscellaneous entries to OSHI's accounts
receivable journal.
5. Centuri Made Material Misstatements in Its
Forms 10-Q for the First Three Quarters of 1990
The improper accounting practices described above and other
practices of similar purport and object continued at OSHI into
1990. As a result, Centuri materially understated its respective
net losses in its Forms 10-Q for the first three quarters of
1990. In the first quarter of 1990, Centuri reported a net loss
of $1,382,000 when it should have reported a loss of $2,503,302.
In its Form 10-Q for the second quarter of 1990, Centuri reported
a net loss of $2,245,000 when it should have reported a loss of
$5,104,850. In its Form 10-Q for the third quarter of 1990,
Centuri reported a net loss of $486,000 when it should have
reported a loss of $3,078,124. Accordingly, Centuri Forms 10-Q
for the first three quarters of 1990 were materially misleading.
6. Centuri Failed to Maintain Accurate Books
and Records in 1989 and 1990
OSHI failed to maintain accurate books and records in 1989
and 1990. In its books and records, OSHI recorded assets for
which there was no support, failed to record certain accounts
payable liabilities in the proper reporting period and, in some
instances, failed to record certain accounts payable liabilities
altogether. Further, OSHI failed to record, in its books and
records, asset reserves and certain other liabilities as required
by GAAP. OSHI also staged sales, which caused its books, records
and accounts to reflect inaccurately its transactions and the
disposition of its assets. Additionally, when OSHI voided checks
that had been drawn to pay accounts payable, OSHI reinstated the
funds to its cash balance, but failed to reinstate the
corresponding accounts payable. These accounting practices
caused OSHI to maintain inaccurate books and records and led to
==========================================START OF PAGE 6======
Centuri's material misstatements of net income, liabilities and
assets described above in Parts III.A.4. and III.A.5.
7. Centuri Failed to Devise and Maintain Internal Controls
at OSHI
Centuri failed to devise and maintain a system of internal
controls at OSHI. OSHI's internal controls had "material
weaknesses."-[4]- These material weaknesses allowed and
helped to prevent detection of the accounting errors and
irregularities which resulted in the material misstatements
described above. OSHI did not maintain the segregation of duties
normally found in accounting departments. OSHI had virtually no
system of internal controls to monitor accounts payable
liability. OSHI lacked internal controls to assure that
inventory received and booked as assets had the corresponding
liability properly recorded. There were no controls in place to
assure that when checks were voided off the accounts payable
system and cash reinstated to OSHI's cash balance, the
corresponding payables were reinstated to the accounts payable
system.
8. Centuri Failed to File Forms 10-K for 1990, 1991, 1992
and 1993 and Forms 10-Q During 1991, 1992, 1993 and
1994
Centuri's last periodic report filed with the Commission was
a Form 10-Q for the quarter ended September 30, 1990, filed on
November 14, 1990. Centuri did not file a Form 15 (Certification
and Notice of Termination of Registration under Section 12(g) of
the Exchange Act or Suspension of Duty to File Reports Under
Section 13 or 15(d) of the Exchange Act) or a Form 12b-25
(Notification of Late Filing). Although Centuri filed a report
on Form 8-K on March 15, 1991 that indicated that its 1990 Form
-[4]- Generally Accepted Accounting Standards
("GAAS") generally define a material weakness
in internal accounting controls as:
a condition in which the specific control
procedures, or the degree of compliance with them,
are not sufficient to achieve a specific control
objective--that is, errors or irregularities may
occur and not be detected in a timely period by
employees in the normal course of performing their
assigned functions. A weakness is material if the
condition results in more than a relatively low
risk of such errors or irregularities in amounts
that would be material in relation to the
financial statements. [See AU 642 of Statement
of Auditing Standards No. 30, .30].
==========================================START OF PAGE 7======
10-K would be filed late due to the problems at OSHI, Centuri
never filed a Form 10-K for 1990 and has not made any other
periodic reports since its Form 10-Q for the ended quarter
September 30, 1990.
B. LEGAL DISCUSSION
1. Violations of Section 13(a) of the Exchange Act
and Rules 13a-1, 13a-13 and 12b-20
Section 13(a) of the Exchange Act requires all issuers
subject to the reporting requirements of the Exchange Act to file
periodic and other reports with the Commission containing such
information as the Commission's rules prescribe. Rule 13a-1
requires such issuers to file annual reports with the Commission
and Rule 13a-13 requires such issuers to file quarterly reports.
Issuers must disclose their assets, liabilities and net income,
among other things, in these reports. See Generally, Regulation
S-X. Implicit in the requirements of Section 13(a) of the
Exchange Act is that the information supplied be accurate. SEC
v. Kalvex, 425 F. Supp. 310, 316 (S.D.N.Y. 1975). The annual and
quarterly reports, filed on Forms 10-K and 10-Q, respectively,
are required to contain financial statements in accordance with
Regulation S-X, which in turn requires conformity with GAAP. 17
C.F.R. 210.4-01(a)(1) (1991) ("Financial statements filed with
the Commission which are not prepared in accordance with
generally accepted accounting principles will be presumed to be
misleading or inaccurate"). Rule 12b-20 requires such reports
contain any information necessary to ensure that other statements
in the reports are not, under the circumstances, materially
misleading. SEC v. Falstaff Brewing Corp., 629 F.2d 62, 71 (D.C.
Cir. 1980), cert. denied, 449 U.S. 1012 (1980).
Violations of the reporting provisions do not require a
showing of scienter. SEC v. Willis, 472 F. Supp. 1250, 1268
(D.D.C. 1978) (citing SEC v. Savoy Industries, Inc., 587 F.2d
1149, 1166-67 (D.C. Cir. 1978), cert. denied, 440 U.S. 913
(1979)). To be actionable, the misstatements or omissions must,
however, be material. The materiality element is satisfied by
showing that there is a substantial likelihood that, under all
the circumstances, the misstated or omitted fact would have
assumed actual significance in the deliberations of a reasonable
investor. Basic, Inc. v. Levinson, 485 U.S. 224, 232 (1988).
Facts concerning a company's true financial condition are
material. SEC v. World-Wide Coin Investments, 567 F.Supp. 724,
759 (N.D. Ga. 1983).
The Commission has determined that Centuri, in its 1989 Form
10-K, overstated its net income by 322%, understated its accounts
payable by 37.5%, understated its accrued liabilities by 14.5%
and overstated its accounts receivable by 4.3%. In its Forms 10-
Q for the first, second and third quarters of 1990, Centuri
==========================================START OF PAGE 8======
understated its respective net losses by 81.1%, 127.4% and 533.4%
of what it reported. These misstatements are material, because,
had the information been reported accurately, it certainly would
have assumed actual significance in the deliberations of a
reasonable investor in Centuri securities. Consequently, the
Commission has determined that Centuri violated Section 13(a) of
the Exchange Act and Rules 13a-1, 13a-13 and 12b-20.
The Commission has also determined that Centuri failed to
file Forms 10-K for 1990, 1991, 1992 and 1993 and Forms 10-Q for
1991, 1992, 1993 and 1994. Centuri's last periodic filing was a
Form 10-Q for the third quarter of 1990. Therefore, the
Commission has determined Centuri violated Section 13(a) of the
Exchange Act and Rules 13a-1 and 13a-13.
2. Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange
Act
Section 13(b)(2) of the Exchange Act was enacted to promote
the reliability and completeness of financial information that
issuers are required to file with the Commission or to
disseminate to investors pursuant to the Exchange Act. SEC v.
World-Wide Coin Investments, 567 F. Supp. at 752. There is no
need to show scienter in order to establish a violation of
Section 13(b)(2) of the Exchange Act. Id. at 749. When an
issuer subject to Section 13(b)(2) of the Exchange Act controls
more than 50% of the voting securities of a subsidiary, the
Commission expects compliance with Section 13(b)(2) of the
Exchange Act by such subsidiary. Interpretive Release on Foreign
Corrupt Practices Act, Exchange Act Release No. 17,500, Fed. Sec.
L. Rep. (CCH) 23,632H at 17,321-14 (Jan. 29, 1981).
Section 13(b)(2)(A) of the Exchange Act requires every
issuer of securities registered pursuant to Section 12 of the
Exchange Act to make and keep books, records, and accounts,
which, in reasonable detail, accurately and fairly reflect its
transactions and disposition of assets. OSHI, Centuri's wholly-
owned subsidiary, maintained books and records that did not
accurately reflect OSHI's liabilities and assets, in
contravention of GAAP. OSHI recorded assets for which there was
no support, recorded certain accounts payable liabilities in the
improper reporting period and, in some instances, failed to
record certain accounts payable liabilities altogether. OSHI
failed to record asset reserves and certain other liabilities as
required by GAAP. OSHI also staged sales, which caused it to
books, records and accounts to reflect inaccurately its
transactions and the disposition of its assets. Accordingly, the
Commission has determined that Centuri violated Section
13(b)(2)(A) of the Exchange Act.
Section 13(b)(2)(B) of the Exchange Act requires such
issuers to devise and maintain a system of internal accounting
==========================================START OF PAGE 9======
controls sufficient to provide reasonable assurances that
transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP. See SEC v.
World-Wide Coin Investments, 567 F. Supp. at 752. The Commission
has also determined that Centuri violated Section 13(b)(2)(B) of
the Exchange Act. OSHI, Centuri's wholly-owned subsidiary, did
not maintain the segregation of duties normally found in
accounting departments. OSHI lacked internal controls to assure
that inventory received and booked as assets had the
corresponding liability properly recorded. There were no
controls in place to assure that when checks were voided off the
accounts payable system and cash reinstated to OSHI's cash
balance, the corresponding payables were reinstated to the
accounts payable system. In addition, there were no internal
controls in place at OSHI to assure that a deleted check or
pulled vendor invoice was reentered into the accounts payable
system. The Commission has determined that Centuri's failure to
ensure that OSHI had proper internal controls in place resulted
in the material misstatements described above in Sections
III.A.4, 5 and 6. Accordingly, the Commission has determined
that Centuri violated Section 13(b)(2)(B) of the Exchange Act.
IV.
Based on the foregoing, the Commission finds that:
Centuri violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B)
of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13
thereunder.
==========================================START OF PAGE 10======
V.
ORDER
In view of the foregoing, it is in the public interest to
impose the sanctions agreed to in the Offer.
Accordingly, IT IS HEREBY ORDERED THAT:
Centuri, pursuant to Section 21C of the Exchange Act, cease
and desist from committing or causing any violation, and from
committing or causing any future violation, of Sections 13(a) and
13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13
promulgated thereunder.
By the Commission.
Jonathan G. Katz
Secretary